DigitalOcean, a cloud computing provider, is making waves by focusing on a segment often overlooked by industry titans: small and medium-sized businesses (SMBs). While giants like Amazon, Microsoft, and Alphabet dominate the trillion-dollar cloud landscape and the burgeoning market for artificial intelligence (AI) cloud services, DigitalOcean is carving out its niche by offering specialized, cost-effective solutions tailored to the unique needs of SMBs. The company’s recent foray into AI services is particularly noteworthy, providing affordable access to this transformative technology for its customer base.
DigitalOcean is coming off of an incredibly strong 2024, marked by record revenue and soaring profits. Despite a 29% stock price gain this year, DigitalOcean’s stock still appears to be undervalued, with shares available for less than $50. Here’s why it might be a great idea for investors.
Delivering AI Solutions to Small Businesses
DigitalOcean’s customer base extends from start-ups to companies with up to 500 employees. These businesses often lack the substantial cloud budgets that attract major providers like Amazon and Microsoft. However, DigitalOcean is gaining ground by offering affordable and transparent pricing, personalized service, and user-friendly tools that are ideal for companies without in-house technical staff.
By the end of 2024, DigitalOcean served 165,400 customers with diverse needs, ranging from basic data storage and website hosting to complex software development tools. The company reports that approximately 80% of these customers aim to integrate AI into their operations, while 70% express concerns about cost and expertise. Addressing this need, DigitalOcean has expanded its AI service portfolio to include data center infrastructure, access to leading third-party AI models, and a generative AI platform that enables customers to create their own AI agents without coding experience. These agents, for example, can be deployed as customer service chatbots on a business’s website.
DigitalOcean’s AI data center infrastructure differentiates itself by allowing businesses to utilize between one and eight graphics processing units (GPUs) from leading suppliers like Nvidia, enabling them to run even the smallest AI workloads. In contrast, larger cloud providers often focus on delivering massive clusters of GPUs to clients working on the most advanced AI models.
As a result, DigitalOcean is quickly becoming a prime destination for thousands of businesses seeking to harness the power of AI. This is reflected in the remarkable 160% surge in the company’s annual recurring revenue (ARR) from its AI services during the fourth quarter of 2024 (ended December 31).
DigitalOcean’s Profits Surge in 2024
DigitalOcean’s total revenue reached a record $780.6 million in 2024, a 12.6% increase compared to the previous year. While its growth rate has slowed compared to previous years, primarily due to a strategic decision to improve profitability by controlling expenses, the company’s financial performance has been impressive.
DigitalOcean slightly increased spending on research and development and marketing, but overall operating expenses decreased by 2.7%. This indicates a shift toward greater profitability. The result was a significant increase in profits. The company’s GAAP (generally accepted accounting principles) net income for the year reached $84.5 million, representing a 335% increase year-over-year. This focus on the bottom line positions DigitalOcean for long-term sustainability. With increased profitability, the company will need less future financing, and management has more flexibility to invest in marketing and product development, which are key drivers of future growth.
DigitalOcean Stock: A Compelling Value Proposition
Despite the recent gains, DigitalOcean’s stock still trades 68% below its 2021 all-time high, reached during the tech boom. Its price-to-sales (P/S) ratio has declined to 5.1, a considerable improvement from the peak of almost 30 in 2021 when the market was overvalued. This is a 16% discount to its three-year average P/S ratio of 6.1 (excluding the elevated period from 2021).
Based on DigitalOcean’s 2024 GAAP earnings per share of $0.89 its stock also trades at a price-to-earnings (P/E) ratio of 45.8. While this might seem expensive compared to the Nasdaq-100 technology index with a P/E ratio of 34.1, this could change quickly if DigitalOcean continues strong growth in 2025.
DigitalOcean estimates its addressable market could reach $138 billion this year and grow to $251 billion by 2028 which means the company has significantly more growth potential. This promising outlook suggests DigitalOcean could be an excellent long-term addition to an investor’s portfolio.
